India Bank fell over 13 per cent, Bank of India fell nearly 7 per cent while most other constituents of PSU Bank index declined in the range of 2 to 6 per cent.
The acute stress in the auto sectors continued to show on the bourses while the metal stocks also declined sharply over growth concerns.
The Sensex closed 289.13 points lower at 37,397.24 from its previous close of 37,686.37. It opened at 37,735.54 from its Monday's close of 37,686.37. The Nifty fell 103.80 points lower at 11,085.40.
"Broad-based selling dragged the indices to lower level as investors remain cautious ahead of US-China trade talks, FED policy, US job data and mixed bag of ongoing domestic corporate results," Vinod Nair, Head of Research, Geojit Financial Services, said.
"Liquidity constraints and sluggish outlook on auto sector indicates that consolidation may continue. Fall in 10 year bond yield in expectation of further 25bps rate cut by the RBI may ease liquidity crunch to some extent."
Shares of Indiabulls Housing Finance took a heavy hit in the past two days amid allegations of embezzlement of more than Rs 1 lakh crore from the National Housing Bank (NHB). However, the company has denied the same.
Coffee Day Enterprises hit the lower circuit on the BSE during early trade after reports that V.G. Siddhartha, the company's founder, has gone missing.
( With inputs from IANS )